Full Judgment
The Department has not obtained the requisite approval from the Committee of Disputes and hence both the appeals filed by the Department are not maintainable. They are therefore dismissed in limine. The assessee has however obtained the approval of the COD to pursue the litigation before this Tribunal against the orders of the CIT(A) regarding certain disallowance which results in depletion of accumulated deprecation and unabsorbed business loss for all the three years under appeal. Therefore the appeals filed by the assessee are taken up for adjudication.
1. a) The ld. CIT(A) erred in confirming the disallowance made by the Assessing Officer Under Section 37(3A) of the I-T Act in respect of expenses of Rs. 335,408 reimbursed/paid to Advocates/Solicitors of the appellant.
b) The ld. CIT(A) ought to have held that expenses on hotel, car hire etc. incurred by Advocates/Solicitors for appellant's work at foreign stations could not be disallowed Under Section 37(3A) of the I-T Act, 1961.
3. The present assessment has been completed by the Assessing Officer Under Section 143(3)/263 pursuant to the directions issued by the ld.CIT in his order passed Under Section 263 on 20.02.1989 setting aside the original assessment with the direction to the Assessing Officer to frame a fresh assessment. The Assessing Officer has disallowed hotel expenses, car hire expenses and entertainment expenses aggregating to Rs. 3,35,408/-, being the expenses reimbursed/paid by the assessee on the foreign tour of its Advocates and Solicitors Under Section 37(3A) of the I-T Act. While making the impugned disallowance, the Assessing Officer has relied on the observations made by the ld. CIT in his order Under Section 263 that the assessee could have made the payments directly to the Advocates or Solicitors instead of bearing or reimbursing the impugned expenses incurred by the Solicitors and Advocates. According to him, the impugned expenses were squarely hit by the provisions of Section 37(3A). On appeal, the ld. CIT(A) has confirmed the order of the Assessing Officer in this behalf.
4. We have heard the parties. It is true that the payments made to hotels are hit by Section 37(3A)/37(3B). The question however is as to what is the true character of the impugned payments, i.e., heather they are in the nature of payments to hotels or a part of legal charges.
Apparently the payment has been made to the hotels. However it is not the form but the substance of the transaction that helps us to determine the true character of payment. In order to examine the true character of the expenditure it is necessary to keep in mind that the assessee had engaged the Advocates and Solicitors for handling its legal matters. The impugned expenses met by the assessee on the tour of its Advocates and Solicitors are, truly speaking, in the nature of legal expenses. It is stated in the orders of the Departmental authorities that if the Advocates and Solicitors had themselves met this expenditure, it would not have been hit by Section 37(3A)/37(3B).
In our view, it would not alter the true character of the expenditure only because of the fact that the payments have been made by the assessee for and on behalf of the Advocates/Solicitors instead of by the Advocates and Solicitors themselves. The expenses incurred on Advocates and Solicitors are essentially legal expenses which are allowable Under Section 37(1) and not hit by Section 37(3A)/(3B). In this view of the matter, ground no. 1 taken by the assessee is allowed.
2. a) The ld. CIT(A) erred in confirming the disallowance made by the Assessing Officer Under Section 37(3A) n respect of expenses on Customer services etc. of Rs. 6,00,74,389.23.
b) The ld. CIT(A) ought to have held that the expenses of Rs. 6,00,74,389.23 in respect of expenses on Customer services etc. were includible in direct cost incurred by the appellant in providing the services to passengers, in respect of which the appellant had recovered/charged fare to the passengers and as a consequence such expenses were outside the purview of provisions of Section 37(3A) and as a consequence not disallowable Under Section 37(3A).
3. a) The ld. CIT(A) erred in confirming the disallowance made by the Assessing Officer Under Section 37(3A) of Catering Expenses incurred by the appellant of Rs. 22,62,26,779/- b) The ld. CIT(A) ought to have held that such Catering expenses on passengers were includible in direct cost incurred by the appellant for providing the services to passengers in respect of which the appellant had charged/recovered fare from passengers and hence it was outside the purview of provisions of Section 37(3A) of the I-T Act 1961 and as a consequence not disallowable Under Section 37(3A).
4. a) The Id. CIT(A) erred in confirming disallowance made by the Assessing Officer of Customer Services Hotel expenses of Rs. 7,96,19,947/-.
b) The ld. CIT(A) ought to have held that such expenses on hotel were includible in direct cost incurred by the appellant in providing the services to passengers in respect of which the appellant had charged/recovered fare from passengers is outside the purview of provisions of Section 37(3A) of the I-T Act 1961 and as a consequence not disallowable Under Section 37(3A).
6. The facts of the case are that the assessee had incurred expenses amounting to Rs. 6,00,74,389/- during the previous year relevant to the assessment year under appeal on providing certain services to its customers like cabin service materials, overnight bags, compensation for damaged bags etc. (Ground No. 2). In addition, the assessee had incurred catering expenses of the passengers on ground (Rs. 77,26,328/-) and on board (Rs. 21.85 crores) (Ground No. 3). The assessee had also incurred expenses amounting to 7,96,19,947/- to provide hotel facilities to its passengers in accordance with international conventions followed by all International air carriers (Ground No. 4). The assessee had to make stay arrangements for its passengers in the hotels on account of delay in flight due to defect in the aircraft, bad weather, etc. The Assessing Officer has disallowed all the aforesaid expenses Under Section 37(3A) on the ground that they are hit by Section 37(3A)/37(3B) of the I-T Act. On appeal, the ld.CIT(A) has confirmed the action of the Assessing Officer.
7. In support of appeal, the ld. Authorized Representative for the assessee submitted that the assessee had to incur the aforesaid expenses in the course of its business, which was to carry passengers on Air India flights. The assessee further submitted that the impugned expenses were in the nature of cost of goods/services/amenities required to be provided to the passengers on its international flights and hence they could not be treated to be in the nature of sales promotion expenses within the meaning of Section 37(3B)(i). He also invited our attention to the provisions of Section 37(3C) and submitted that the impugned expenses incurred by the assessee outside India in respect of services and facilities in the course of its business have been specifically excluded from the purview of Section 37(3A). He has placed reliance on the decision in CIT v. Hindustan Motors Co. 192 ITR 619 (Cal.), Cit v. The Statesman Ltd. 198 ITR 582 (Cal.), CIT v. Print Systems Products 243 ITR 8 (Mad.) and decisions of this Tribunal in Ramnath Exports Pvt. Ltd. v. ISE 42 TTJ (Del.) 441 and Nelco India Pvt.
Ltd. v. ITO 36 ITD 224 (Del.). In reply, the ld. Departmental Representative supported the order passed by the CIT(A) confirming the impugned disallowances.
8. We have heard the parties. The assessee is engaged in the business of carrying passengers on its international flights. The assessee is required to provide certain facilities to its customers as all other International Airlines provide. However, the departmental authorities have taken the view that the impugned expenses are sales promotion expenses and thus hit by Section 37(3B) of the I-T Act. Perusal of Section 37(3B)(i) of the IT Act, as it existed at the relevant point of time, shows that the expenses covered by the said provisions are those, which are incurred by the assessee by way of "Advertisement, publicity and sales promotion". The expression "sales promotion" used in Section 37(3B)(i) has not been defined anywhere in the I-T Act. Section 37(3B) was enacted with a view to curbing certain categories of avoidable or ostentatious expenditure by the assessees carrying on business or profession. The expression "sales promotion" is preceded by the words "advertisement" and "publicity" in Section 37(3B)(i), which means that the neaning of the term "sales promotion" has to take its colour from the preceding words namely advertisement and publicity. The principle of ejusdem generis restricts the meaning of general words to things or matter of the same genus as the preceding particular words. If so interpreted, the phrase "sales promotion" cannot be interpreted to include the selling expenses or the expenses incurred in providing services to the customers in the ordinary course of business. The phrase "sales promotion" would mean and cover only those expenses which are incurred with a view to promote sales in the same way as advertisement and publicity. If the customers have paid for certain services, the assessee would be required to provide those services to the customers and the expenses so incurred on providing such services to the customers as part of business dealings and contractual obligations would, in our opinion, not be hit by Section 37(3B)(i). The assessee has incurred the impugned expenses after it booked the passengers and after it effected the sales. The expenses have been incurred not to promote the sales but to provide certain facilities to the customers in lieu of the airfare paid by them. They have been incurred in the ordinary course of business and as a part of contractual obligations towards passengers. They are also in conformity with the international conventions, which require all international air operators to provide certain facilities to the international passengers. The impugned expenses cannot therefore be called as sales promotion expenses within the meaning of Section 37(3B)(i) of the I-T Act.
9. The ld. Authorized Representative for the assessee is right in his submission that the provisions of Section 37(3C) of the I-T Act are squarely applicable on the facts of the case and therefore the provisions of Section 37(3A) would be inapplicable. Section 37(3C) as it existed at the relevant point of time, provided that the provisions of Section 37(3A) would not apply in respect of expenditure incurred by an assessee, being a domestic company as defined in Section 80B(2) as it existed then, on advertisement, publicity and sales promotion outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business. There is no doubt that the assessee is a domestic company. Even if the impugned expenses are held to be in the nature of sales promotion expenses, the provisions of Section 37(3A) would be inapplicable in view of the bar created by Section 37(3C) of the I-T Act. It is not in dispute that the assessee is an international carrier and has incurred the impugned expenses outside India to provide certain services to its passengers in the course of its ordinary business.
10. The view that we have taken in the matter is also supported by the decisions referred to by the ld. Authorized Representative for the assessee. In view of the aforesaid, the order of the CIT(A) confirming the impugned disallowances is vacated. Ground nos. 2, 3 and 4 are allowed. Appeal filed by the assessee is allowed.
1. a) The ld. CIT(A) erred in confirming the disallowance made by the Assessing Officer Under Section 37(3A) of Hotel expenses on passengers of Rs. 8,21,55,356/-.
b) The ld. CIT(A) ought to have held that such expenses on hotel were includible in direct cost incurred by the appellant in providing the services to passengers in respect of which the appellant had charged/recovered fare from passengers is outside the purview of provisions of Section 37(3A) of the I-T Act 1961 and as a consequence not disallowable Under Section 37(3A).
We have heard the parties. We have already considered and decided this issue in favour of the assessee in our order in the assessee's appeal for the AY 1984-85. Following the aforesaid order, ground no. 1 is allowed.
2. a) The ld. CIT(A) erred in confirming estimated disallowance of Rs. 6,00,000/- Under Section 40A(5) made by Assessing Officer in respect of employees posted abroad.
b) The ld. CIT(A) erred in confirming the contention of Assessing Officer that for the purpose of Section 40A(5)(b) the employees should be posted abroad for the job and not applicable in case of employee transferred for short duration.
13. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has not offered any disallowance in respect of payment of salary to the employees posted outside India in terms of Section 40A(5). He therefore estimated a sum of Rs.6 lakhs for disallowance on account of period of employment of the employees outside India. The plea of the assessee that its case was covered by Section 40A(5)(b)(i) and hence the provisions of Section 40A(5)(a) were inapplicable, was not accepted by the Assessing Officer with the following observations: 3.2(iv) The assessee has not offered any disallowance in the case of those employees who are posted outside India. During the discussion, it has been claimed that as per provisions of Section 40A(5)(b)(i), the provisions of Section 40A(5) are not applicable to any expenditure or allowance in relate to any employee in respect of any period of his employment outside India. I do not agree with this contention of the assessee. The contract of the employee with the company is in India and it is not as if the employee was to serve out of India as a result of agreement with the company. The employees are employed by the company in India and because the company has some branches abroad, the time spent abroad cannot be described to be the period of employment outside India. The question of period of employment outside India will arise only where under the terms of employment an employee is required to spent a specific period outside India. Disallowance of Rs. 6 lakhs, on estimate basis, is made on this account.
14. We have heard the parties and considered their submissions. The impugned disallowance has been made on ad-hoc basis Under Section 40A(5)(a) after rejecting the submission of the assessee that its case was covered by Section 40A(5)(b)(i). The assessee has global presence.
Its employees are subject to posting abroad or at places within India in terms of their contracts of employment and in the exigencies of business. The mere fact that they were deputed for a short period would not take the case away from the purview of Section 40A(5)(b)(i). Even shorter period of deputation of an employee outside India would constitute "any period of his employment outside India" within the meaning of Section 40A(5)(b)(i). In this view of the matter, ground no.
2 is allowed.
3. a) The ld. CIT(A) erred in not accepting the submission of the appellant that in respect of foreign travel tax imposed by the Government on passengers provisions of Section 43B were not applicable.
b) In the circumstances of the case and in law, the ld. CIT(A) erred in concluding that Foreign Travel Tax imposed on passengers and collected by the appellant partakes character of fees and same shall be covered under provisions of Section 43B.16. The Assessing Officer has disallowed a sum of Rs. 1,67,48,151/- being collection of foreign travel tax and Rs. 86,371/- being turnover tax in Ceylon Under Section 43B of the I-T Act as they had not been paid till the end of the previous year relevant to the assessment year under appeal. On appeal, the assessee contended before the CIT(A) that the aforesaid sum was not in the nature of taxes or levies as held by the Assessing Officer. The assessee contended before the CIT(A) that the impugned sum was collected on behalf of the Govt, for providing facilities at the Airport to the passengers undertaking foreign travels. The ld. CIT(A) however did not agree with the aforesaid submission of the assessee and held that the provisions of Section 43B were applicable in respect of foreign travel tax collected by the assessee. While disposing off the issue the ld. CIT(A) has held as under: 5.2 I have gone through the contention of the appellant, in so far as it relates to applicability of Section 43B is concerned in respect of foreign travel tax, the same does not hold good in the instant case. The provisions of Section 43B(a) refers to any sum payable by the assessee by way of tax, duty, cess or fees by whatever name called under any law for the time being in force. In the instant case, even if the amount recovered by the appellant partakes the character of fees, the same shall also be covered for the purpose of Section 43B as the same is collected under the enactment passed by the Govt, and as such the disallowance made by the Assessing Officer on this account needs to be confirmed.
17. We have heard the parties and considered their submissions. In our view, the ld. CIT(A) has correctly appreciated the legal aspects of the case. Foreign travel tax is covered by Section 43B of the I-T Act. We therefore endorse the order of the CIT(A). Ground No. 3 taken by the assessee is dismissed.
18. Before parting with the issue it deserves to be mentioned that the CIT(A), after holding that Section 43B is applicable to foreign travel tax, has deleted the disallowance with the following observations: 5.2 However, as regards the application of proviso attached to the aforesaid section w.e.f 1.4.1988 is concerned the apex court has held that the same is clarificatory in nature and should be applicable retrospectively. In view of this fact, the Assessing Officer is directed to verify the appellant's claim that the same were paid prior to the date allowed Under Section 139(1) of the I-T Act and may allow the claim accordingly. Where as in case of Ceylon Turnover tax the Hon'ble ITAT has in the appellant's own case has decided that the provisions of Section 43B are not applicable for the outstanding liabilities of foreign taxes. As such the additions in this regards are hereby deleted.
19. The aforesaid direction of the CIT(A) is the subject matter of appeal as ground No. 3 in department's appeal for AY 1985-86. We are therefore not expressing any opinion on the aforesaid part of the order of the CIT(A) while disposing of the ground of appeal taken by the assessee. In view of the aforesaid, the appeal filed by the assessee is allowed.
1. The ld. CIT(A) erred in confirming estimated disallowance of Rs. 6,00,000/- Under Section 40A(5) made by Assessing Officer in respect of employees posted abroad.
We have already considered and decided this issue in favour of the assessee in our order in assessee's appeal for AY 1985-86. Following the aforesaid order, ground No. 1 is allowed.
2. The ld. CIT(A) erred in confirming the disallowance contention of Assessing Officer of Rs. 40,000/- in respect of remuneration to the Managing Director.
22. The impugned disallowance has been confirmed by the CIT(A) with the following observations: 6. The next ground of appeal relates to disallowance made by the Assessing Officer amounting to Rs. 40,000/- from the remuneration to Managing Director. The appellant while filing the return of income disallowed sum of Rs. 20,413/- Under Section 40(c) being amount of expenditure incurred in excess of Rs. 1,02,000/- paid to Managing Director. However, according to the Assessing Officer, the Managing Director being employee of the company, the disallowance should be made as per provisions of Section 40A(5) and as such made an addition on estimated basis amounting to Rs. 40,000/-. The Assessing Officer has relied on the judgment of Kerala High Court in case of CIT v. Travancore Chemical Mfgrs. Ltd. 133 ITR 809. Where in it has been held that for employee director the provisions of Section 40A(5) and not 40(c) are applicable. It is also submitted that the apex court has rejected the sp. Leave petition against the said order. Where as the appellant has relied on the judgment of Bombay High Court in case of Hico Products P. Ltd. 201 ITR 567.
6.2 I have gone through the contention of the appellant as well as that of the Assessing Officer. There is no doubt as to the fact that the appellant company is a public sector undertaking and the directors of the company are employees of the said company. Further the decision relied upon by the appellant does not support its arguments for the reason that even as per the decision of Hon'ble Bombay High Court citea supra it is only provisions of Section 40A(5) Sub-clause (c) would apply and not the provisions of Section 40(c) as envisaged by the appellant. In view of the fact that decision of Kerala High Court in case of Travancore Chemicals mfrs.
Ltd. are accepted by the apex court I have no reason to divulge from the same and as such addition made by the Assessing Officer in this regrd is hereby confirmed.
23. We have heard the parties and considered their submissions. In our view, the ld. CIT(A) has correctly decided the issue. We therefore endorse his order. Ground No. 2 is dismissed. Appeal filed by the assessee is partly allowed.
24. As stated earlier, the Department has filed both the aforesaid appeals without obtaining the clearance from the Committee of Disputes.
Ld. Departmental Representative could not produce a copy of the approval accorded by the COD. In this view of the matter, both the appeals are not maintainable. They are, therefore, dismissed in limine.
Order pronounced at the time of hearing.